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View: Exports are committee-and ministry-proof, and past surges anticipated by neither

GDP numbers are interlinked to export growth, and India needs to improve both numbers.

Updated: Nov 06, 2019, 06.16 AM IST
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The future prospects of global trade are bleak. The US-China trade spat and Brexit have hit world trade and GDP growth. So, India’s GDP and export prospects are also bleak.
Indian exports have grown very little since 2013. No economy in the world has had GDP growth of 7% for a long period — the definition of a miracle economy — without double-digit export growth. Hence, the recent fall in India’s GDP growth — just 5% in the April-June quarter — may become the new normal unless exports rise dramatically.

The commerce ministry appointed a high-level advisory group (HLAG) to accelerate exports. Will its recent report do the job? Alas, no. There can be no more emphatic a rejection of HLAG’s attempt to accelerate exports than GoI’s decision to stay out of the Regional Comprehensive Economic Partnership (RCEP) on Tuesday.

In the words of economist Ajit Ranade, India wants to Look East, Act East, but not Embrace East.

Exports’ve Their Own Map
Truth is, India’s exports are committeeproof. And ministry-proof. The most dramatic export surges in the past were unanticipated by committees or ministries. Finance Commission chairman NK Singh once said that India succeededin software because there was no ministry for software. By that logic maybe we should abolish the commerce ministry.

The ministry has no control over dozens of factors that make exports competitive. India needs to be competitive in input costs like land, labour, capital, electricity, tax and freight rates; in infrastructure & procedures; in education, skills and research and development. All these issues lie outside the commerce ministry’s remit.

HLAG shows that Indian exports are highly correlated with global exports. In 2003-11, India’s exports of goods surged 19.9% and services 21.8% a year.

Then, in 2012-17, export growth in goods slumped to –0.2% and in services to 4.8% a year. World trade likewise expanded by 10.5% in the boom of 2003-11 and crashed to just 1.6% a year in 2012-17. This should not necessarily kill Indian exports. India’s share of world trade is tiny. So, it should be possible to increase this even in a stagnant global market, as Vietnam and Bangladesh are doing. But not India.

The future prospects of global trade are bleak. The US-China trade spat and Brexit have hit world trade and GDP growth. So, India’s GDP and export prospects are also bleak.

Apart from global growth momentum, what worked in 2002-11 and didn’t in 2012-17? Some economists say India’s real effective exchange rate (REER) was kept unchanged earlier, but appreciated in 2012-17, hitting export competitiveness. HLAG uses data from the Bank of International Settlements to argue that the REER actually remained stable and did not appreciated in either period. This contradicts RBI data suggesting the rupee appreciated since 2004-05 by 25.25% using a six-currency basket and by 15.5% using a 36-currency basket.

One major measure suggested by HLAG is to create ‘elephant bonds’ to attract foreign resources into infrastructure development. The absence of a strong bond market has seriously impacted long-term funding of infrastructure.

HLAG suggests a one-time amnesty for declaring hidden foreign assets and income, with the income/assets taxed at just 15% and 40% of such money being invested in 5% government-guaranteed bonds with 20 years maturity. It hopes this will revolutionise the bond market, spurring finance for long-gestation projects.

No More Low-Hanging Fruits
I am sceptical of ‘one time’ amnesties that in practice are used repeatedly, encouraging tax evasion rather than reducing it. Besides, the Supreme Court has nixed future amnesties. HLAG’s suggestions for bypassing the court’s ban are unconvincing.

HLAG lists six major issues. First, the Indian mindset is still protectionist and inward-looking and must change. Agreed, but how? Second, HLAG says India’s exchange rate was stable both in the trade boom and subsequent slump, so this issue is irrelevant to exports. Third, India’s real interest rates are much too high. RBI is cutting interest rates, but not fast enough.

Fourth, HLAG says Indian corporate tax rates are too high. This problem has been solved by the recent slash in corporate tax rates. Fifth, labour laws are too tough. Very true, but sermons for decades on this issue have yielded few political converts.

Sixth, the recent raising of import duties is unfortunate and must be reversed. Any import tariffs to nurture a fledgling industry must have sunset clauses. Here, too, sermons have failed to move.

In the 2000s, India created three world-class exporters: software/business process outsourcing (BPO), pharma and auto. None of these was foreseen as a champion in the 1990s. Software became significant only with the Y2K scare of 2000. The pharma sector fought the Uruguay Round that created the World Trade Organisation (WTO), saying tough WTO patent protection would wipe out Indian firms. In fact, WTO proved a boon.

The Indian auto industry was totally uncompetitive in the 1990s. But, then, foreign investors interacted with the auto component industry to make small cars and two-wheelers world class. Thus, unanticipated effects of liberalisation created these export champions in the 2000s.

Not a single new champion has been created in the 2010s. HLAG has no explanation. I believe the rotten educational system can produce only a thin veneer of world-class graduates. This sufficed to create three champions in the 2000s, but is unable to create more in today’s difficult conditions.

Everybody including HLAG agrees on improving education, skills and R&D. So, too, on making India competitive in all other inputs mentioned earlier. What’s missing is any political sense of urgency. That clouds the export horizon.

Views expressed are author's own.

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